Jean's Blog

The Money Mom: Saving for Retirement

Posted by Jean

Last week, when I wrote about crunching the numbers to see if you could afford to be a stay-at-home parent, I mentioned that income isn’t the only consideration.  Benefits weigh heavily on this decision too.  Not just health and other insurance benefits (many employers provide life and even a basic disability policy, both of which are important, particularly for parents), but saving for your retirement.

Unfortunately, when you give up a job, you may be giving up matching dollars, if your company contributes to your 401(k).  That can mean big money, but it doesn’t mean you have to stop saving for retirement.  Banking your own cash is so important, even if your spouse is socking away a lot of money, because we just never know what’s going to happen.  No one wants to hear it, but I’ve spoken to too many people who were left struggling to fulfill their retirement needs because a divorce came out of leftfield. Plus, even if things go exactly as planned, it’s nice to have a stake in the game.

So how, exactly, do you save for retirement without the help of an employer?  As a nonworking spouse, you can open what’s called a spousal IRA, as long as you file a joint tax return and your spouse makes at least as much each year in income as your contribution (this is not a hard hill to climb; contributions are limited to $5,000 a year, or $6,000 if you’re 50 or older.  That means if you contribute the full $5,000, your spouse has to bring in an annual salary of at least that much, plus enough to equal whatever he is saving for retirement in his own accounts).

You have two options:  a traditional or Roth IRA.  Let’s break them down:

Traditional IRA:  There are no income limits for a traditional IRA, and in most cases, your contributions are tax-deductible. You’ll pay taxes on the money when you withdrawal down the road in retirement.  The one exception here is if your spouse is covered by retirement plan at work, like a 401(k).  If that’s the case, the tax deduction on your account begins to phase out at an adjusted gross income of $167,000 for joint filers.  That means if your spouse makes more than that, you may not be able to take the full tax deduction, or any deduction at all.  Still, it’s an excellent way to save, particularly if you’re not eligible for a Roth IRA, which we’ll talk about next.

Roth IRA:  The reason that this is the first choice, for most people, is that when you contribute to a Roth, you don’t receive a tax deduction, but withdrawals are tax-free. Depending on how you’re invested, and how the market performs, your money has the potential to grow exponentially, which is a huge tax savings.  In order to be eligible to make the maximum contribution to the Roth, your adjusted gross income on your joint tax return must be no more than $167,000, whether your spouse has a plan at work or not.

Once you’ve decided which plan is for you, and you’re ready to make contributions, you need to decide how to invest your cash. As a stay-at-home parent, time is of the essence, and if you don’t have the extra minutes – or, it’s perfectly fine to admit, the patience – to sit down and select individual investments, you can put yourself on cruise control with a target-date retirement fund.  This kind of investment puts you in a mix of stocks and bonds that is appropriate for your age and when you plan to retire.  So say, for example, you’re shooting for 2035.  You’ll pick a fund with that date in its name, and as time goes on, it will gradually rebalance itself.  As you approach retirement, it will get more conservative, so your money is safe when you need it.

Note: This doesn’t mean you never have to look at your account again.  Rather, you should check in at least once a year, minimum, to make sure that the fund you’ve chosen is on track with the rest of the market.  If it’s floundering, and everything else is flourishing, it’s time for a change.